Can You Take the Home Office Deduction? Probably Not

If you work from home, you may be wondering if you can deduct costs related to your home office — a part of your mortgage payment or rent, for example. But unfortunately the U.S. tax law in this area doesn’t recognize the work-life blend that most home workers practice. If you mix business and personal activities in your home office, you can’t take the deduction.

The Wall Street Journal reports that most people eligible for this potentially lucrative deduction probably don’t take it:

“It is questionable whether most taxpayers who are eligible to take the deduction actually do so,” IRS National Taxpayer Advocate Nina Olson said in a report to Congress last week. She urged lawmakers to offer taxpayers a simpler, optional method of calculating the home-office deduction. [subscription required]

Why don’t more people deduct home office expenses? The WSJ identifies a number of reasons: the law is quite complex, requires extensive record-keeping, and is perceived to raise a person’s risk of being audited.

What might be the ultimate barrier for many home-based web workers, however, is the law’s requirement that, in order to deduct expenses for your home office, you use that part of the home exclusively as your principal place of business. Very few people use their home office only for work, even if it is their main place of business.

This law hasn’t kept up with the reality of work today. If you set up a comfortable home office with a nice computer, filing system, and workspace, you’ll probably do your personal work there — paying bills, for example. You might play games on the computer or use it for socializing too.

The law could allow a proration of time based on how the office is used; for example, allowing you to deduct 80% of costs if you spend 80% of the time in your office working. While this would add to the record-keeping burden, it would have the great benefit of allowing home-based businesses the opportunity to deduct actual expenses, just like other businesses can.